Cost is a vital aspect of businesses that should be effectively managed to obtain higher profit margins. Through proper planning, effective resource allocation and constant monitoring and control, costs can be maintained at an acceptable level. Idle cost and standard cost are two commonly used terms in cost discussions. The key difference between idle cost and standard cost is that idle cost refers to the benefit forgone due to disruptions and stoppages in the production process whereas standard cost refers to a predetermined value or an estimate for a unit of a resource.
1. Overview and Key Difference
2. What is an Idle Cost
3. What is a Standard Cost
4. Side by Side Comparison – Idle Cost vs Standard Cost
What is an Idle Cost?
Idle cost is the opportunity cost (benefit foregone from the next best alternative) occurred due to a status of non-production or various disruptions in the business operation. There are many ways that a company may experience idle costs. Idle capacity and idle labor are two common types of idle costs.
This is the amount of capacity not used for production. Generally, it is very difficult for a business to operate at maximum capacity due to bottlenecks, which are various limitations in the production process.
E.g. In a factory sewing garments, labor is very specialized where one employee will only be engaged in one particular task (e.g. cutting, sewing or buttoning). Some of these tasks take longer than others, which is somewhat inevitable due to the nature of the work. This will create a bottleneck in the subsequent steps in the production floor. Furthermore, if there is machine breakdown or worker absenteeism, bottlenecks will arise. If not for such bottlenecks, the production floor can be operated at full capacity.
Idle labor occurs when workers are paid for the time that they are not involved in the production. If the labor idle time is high, this results in increased loss of profits.
Any type of cost can be idle, thus it does not generate any economic value to the company. Management should be mindful of regarding such situations and attempt to reduce the bottlenecks in the production process in order to create more value.
What is Standard Cost?
Standard cost is a predetermined or estimated cost of performing an operation or producing a product or service, under normal conditions. For instance, if a manufacturing organization is considered, it will incur costs in the form of material, labor and other overheads and produce a number of units. Standard costing refers to the practice of assigning a standard cost for units of material, labor and other costs of production for a pre-determined time period. At the end of this period, the actual cost incurred may be different to the standard cost; thus, a ‘variance’ may arise. Standard costing can be successfully used by companies with repetitive business operations; thus, this approach is very suitable for manufacturing organizations.
How to Set Standard Cost
Two common approaches used to set standard costs are,
- Using past historical records to estimate usage of resources
Past records provide useful information regarding cost behavior; therefore, these can be utilized to gain insights for current estimates. Past information on costs can be used to provide a basis for present period costs.
- Using engineering studies
This may involve a detailed study or observation of operations in terms of material, labor and equipment usage. The most effective control is achieved by identifying standards for quantities of material, labor and services to be used in an operation, rather than an overall total product cost.
Standard Costing provides an informed basis for effective cost allocation and to evaluate production performance. Once Standard Costs are compared with actual costs and variances are identified, this information can be utilized to take corrective actions for negative variances and for future cost reduction and improvement purposes.
What is the difference Between Idle Cost and Standard Cost?
Idle Cost vs Standard Cost
|Idle cost refers to the benefit forgone due to disruptions and stoppages in the production process.||Standard cost is a predetermined cost or an estimated for a unit of a resource.|
|Calculation of Variances|
|Idle cost variances are not calculated separately; however, its effects are captured in variances that calculate efficiency (e.g. Labor idle time variance).||Variances are calculated for standard cost comparing with actual costs.|
|Idle cost always result in an adverse variance since idling resources bring no economic benefits.||Standard cost variances may be favorable (standard cost exceeds actual cost) or adverse (actual cost exceeds standard cost|
Summary – Idle Cost vs Standard Cost
The difference between idle cost and standard cost is a distinct one where idle cost is a result of production stoppages or inefficiencies whereas standard costs are determined at the beginning of an accounting period and compared with actual results at the end of the period. The relationship between idle cost and standard cost is that idling resources increasingly impact variances since idle costs reduce overall efficiency. While useful, standard costing is a costly and time-consuming practice often not affordable to smaller companies. Furthermore, this is seldom applicable to other types of organizations that are not manufacturing companies.
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